Candlestick and Pivot Point Trading Triggers phần 8 pot

Setups and Triggers 245 FIGURE 8.28 RealTick graphics used with permission of Townsend Analytics, LTD. FIGURE 8.29 Google rise Used with permission of www.GenesisFT.com. c08.qxd 9/25/06 8:38 AM Page 245 246 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS THE JACKHAMMER In my experience, the one candle pattern that is associated or synonymous more than any other with the word capitulation is the hammer as Figure 8.30 shows. In Chapter 7, we identified the frequency or the percentage of times over a course of the year on a 15-minute time interval when the ham- mer candle pattern formed at or near the low of a given day. The jackham- mer, however, develops in the middle to the end of the trading session. Usually immediately following the hammer is a bullish candle, or a mara- buzo, a tall green positive (+) assigned candle. What specifically describes the jackhammer? The jackhammer pattern is a hammer candle, but it occurs in the middle to the end of a trading ses- sion. I call it “the search and destroy” stop-loss order pattern. The general market characteristics of this pattern starts off with the market establish- ing a low, then consolidates or trades sideways for a bit, and then without warning sells off abruptly. It is generally that particular sell-off that creates a hammer pattern. Therefore, anyone who had intraday stops too close, under what is considered the primary low for the day, got “bagged and tagged.” In other words, stop-loss orders were elected, and longs were jacked out of their positions and money—as in hit over the head with a billy club and “jacked” (robbed). Trading Rules Defined The jackhammer formation is an extremely powerful intraday reversal for- mation that requires immediate action to enter a long position. The se- quence of events that occur for this pattern is: FIGURE 8.30 c08.qxd 9/25/06 8:38 AM Page 246 • The hammer formed is a secondary low with the close at or near the primary low’s low. • It does not matter whether the real body is formed with a higher close than open or positive assigned value; however, it is generally a more solid signal when the close is above the open. • This action generally completes a bullish convergence in the stochas- tics or MACD oscillator. • Buy on the close of the hammer or the next time periods’ open; initial risk is a regular stop below the hammer’s low. • Give additional importance if this pattern develops near pivot point support targets, especially if there is a confluence of pivot support tar- gets from different time frames. • Stock traders should watch for an increase or a volume spike, which in- dicates an exhaustion bottom is confirmed. Figure 8.31 shows a 5-minute chart on the CBOT mini-Dow. Notice that the “midsession” is defined by the middle of the day. The first intraday low has been established, nearly three hours pass by, and the market makes a nosedive as prices hit a new low for the trading session. In this example, the hammer closes back within the primary low’s range. The trigger to go long is on the hammer’s close or on the open once the hammer formation is con- Setups and Triggers 247 FIGURE 8.31 Used with permission of esignal.com. c08.qxd 9/25/06 8:38 AM Page 247 firmed. Generally, the jackhammer is followed by a blast-off secondary candle as prices surge ahead. What we also have happen is that the market crosses above both moving average values, thus signaling confirmation that this is a valid buy signal. The trigger to buy was at 10393; as you can see, the market ran straight to 10473 before giving an LCD trigger to exit at 10443 for a 50-point Dow move, or $250 per contract. So far in this book, I have given you several patterns that work well for great day trading vehicles, such as the stock index futures contracts. The electronic markets offer retail traders a competitive advantage because they can use a home computer with a DSL or a broadband connection to in- tegrate charting software packages and equal access to markets. The stock index futures contract, such as the mini-Dow contract, has what technical and fundamental traders need: News-driven events and other technical trading market participants both provide volatility and liquidity. Many of the chart examples contained in these pages are a great representation of an average day’s trading patterns. That’s not to say the other stock index markets, such as the e-mini–S&P and the Russell, perform differently; they interact extremely well with each other. In fact, at times I may have a trig- ger in the mini-Dow and take the trade in the S&P, and vice versa. Most times, when the Dow gives me a trigger, that is the market I will trade in. Consider that the e-mini–S&P have an influence from the tech sector. Dow at times may or may not have a similar dollar value move as the S&P. Both markets are great day trading vehicles, as is the Russell. The Dow more times than not has more distinct trading signals; for that reason, I have il- lustrated these setups with using the Dow. As another example of spotting a jackhammer pattern, look at Figure 8.32, which is another 5-minute chart in the Dow. Here you see the sec- ondary low bounce right off a pivot point support; and as the white or pos- itive assigned values show, the candles’ closes are above the opens and what is indicated immediately after the hammer forms. Notice the immedi- ate reaction of the market as the sequence of higher highs, higher lows, and higher closing highs occurs. You can also see confirmation of the buy sig- nal with the moving averages crossing over and with the second candle after the hammer is formed—it closes above both moving average values. This is the confirmation that should give you the confidence to maintain a long position. The stop is initially placed below the hammer’s low. This should not be a stop-close-only as this setup should see an immediate pos- itive reaction. The trigger to go long here was at 10935; the first sign that the bullish drive lost momentum was the lower closing low at 10965, which resulted in a quick 30-point gain. There are times when we see this pattern late in the trading session. But keep in mind that the CBOT Dow contract trades continuously until 4 248 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS c08.qxd 9/25/06 8:38 AM Page 248 P . M . (CT), whereas the e-mini–S&P closes at 3:15 P . M . (CT) and reopens at 3:30 P . M . (CT). This offers day traders more time to play those short squeeze plays that tend to occur toward the end of the day. More important, I covered why I do not look to sell at support levels. These short squeeze plays occur as those who may have sold at higher levels look to cover and take profits, as we see at certain times when the secondary low was re- jected, which is what the hammer represents. Prices tend to move sharply higher in a very short period of time, signifying a rejection of lower prices. It is that price action that shows buyers attracted to the market, and bears start buying back or covering their shorts. Therefore, when you are looking for a pattern such as the high close doji or the jackhammer in this situation, it is a more fruitful venture. One great example is in Figure 8.33, where the jackhammer forms near the end of the session. The trigger to go long was at 10784, which we see as almost an immediate reaction for prices to move sharply higher to nearly 10830. This was another quick 40-point-plus gain, or $200 per contract. Again, this does not sound like big money; but when you consider that the day trading margin is $500 at most online brokerage firms, that is a healthly percentage gain. Setups and Triggers 249 FIGURE 8.32 RealTick graphics used with permission of Townsend Analytics, LTD. c08.qxd 9/25/06 8:38 AM Page 249 Trading Tips • If the stop level is too great a distance, lower or reduce your contract size. • Place hard stop below the low of the hammer candle. • Scale out of positions when the market gives you a windfall profit, and move stops on balance of position above your entry price. Bullish Convergence Pattern In Chapter 4, we went over how the market price makes lower lows, but not by significant measures, and that when prices are at oversold extremes, we should be cautious for market reversals. We went over the market condi- tion of bullish convergence and how to use the stochastics and MACD in- dicators to confirm buy signals when that market condition exists. The jackhammer is a formation that seems to be present in such a situation. Therefore, it is a great method for setting up a potential buy signal once the pattern is confirmed. Look at Figure 8.34, which is a 5-minute chart on the 250 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 8.33 RealTick graphics used with permission of Townsend Analytics, LTD. c08.qxd 9/25/06 8:38 AM Page 250 e-mini–S&P 500 futures. As you see, the midsession of the trading day at 12:30 shows on the charts that the market takes a secondary decline, form- ing that spike bottom hammer pattern. Notice that the very next candle after the hammer is a tall engulfing candle that forms a higher high. Prices then continue on in the sequence of higher highs, higher lows, and higher closing highs, while continuosly trading above the moving averages. If you examine the stochastics at the bottom of the chart, notice that when the price made a new lower low, the reading from the stochastics made a higher low, identifying that bullish convergence existed. If you watched for the stochastics to close back above the 20 percent line to confirm the price reversal and the trigger to go long, you would have had a stress-free trade that resulted in immediate returns. In Figure 8.35, you see another example of the e-mini–S&P, this time with the aid of the MACD study. The jackhammer occurs past the midses- sion and actually closer to the close of business. Here we see both the mov- ing average and the histogram components alerting us to the fact that the price action was oversold and that a reversal was likely. The one-two com- bination of the jackhammer and then the bullish engulfing pattern revealed a forthcoming price reversal. Setups and Triggers 251 FIGURE 8.34 Used with permission of esignal.com. c08.qxd 9/25/06 8:38 AM Page 251 Stocks Get Jacked, Too The psychological aspect of this formation occurs in stocks as well. Believe me, they are not immune to the ravages of human emotion. The example in Figure 8.36 is Comcast Corporation and is a great illustration of how the stochastics indicator confirms that the jackhammer, or secondary low buy signal, was triggered as confirmed with a bullish convergence signal. The fast stochastics indicator shows the timing of both %K and %D closed back above the 20 percent line, confirming a bottom was in place. The trigger to go long here is on the close of the hammer at 26.63; and before the close at 4 P . M . (ET), the market price is at 26.84. The Jackhammer’s One-Two Punch Figure 8.37 shows a 30-minute chart on United Technologies that illus- trates, depending on the time period, that the jackhammer pattern can exist from one day to the next, like a one-two knockout punch that attacks the stops and immediately pops up. Since many traders look at the obvious low point to place their stop-loss order, as this example shows, the jackhammer took out the prior day’s low; and then once again, the one-two pattern de- velops with the hammer and then the next candle being the tall white, or 252 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 8.35 Used with permission of esignal.com. c08.qxd 9/25/06 8:38 AM Page 252 Setups and Triggers 253 FIGURE 8.36 RealTick graphics used with permission of Townsend Analytics, LTD. FIGURE 8.37 RealTick graphics used with permission of Townsend Analytics, LTD. c08.qxd 9/25/06 8:38 AM Page 253 bullish, engulfing candle. This starts the immediate price reversal, with the sequence of higher highs, higher lows, and higher closing highs. See how the market also closes above and continuously trades above both the mov- ing average values. If you know what to look for, trading for a living is a great opportunity; but with opportunity comes responsibility. Prior to entering a trade, you should have your “pregame” setup, complete with your market analysis and rules for entering a trade. Certain rules should start with the techniques covered in this book so far, which include: • Identifying what the market condition is—overbought or oversold bull- ish, bearish, or neutral. • Identifying the levels that the pivot points lines are at, using the various time frames—monthly, weekly, and daily periods. • Setting up your charting software parameters with these specific pivot points moving average values. • Experimenting with variation settings on your own. Then you need to watch and identify when and at what price points the dojis, hammers, and shooting stars develop. Knowledge of these items will arm you with critical information that can help provide protection from overtrading as well as from adverse moves and such pitfalls as reacting on emotions rather than on actual trading signals. SUMMARY The method of market analysis described in this book is designed so you will be educated on the importance of developing your personal trading system and so you can apply the techniques on a consistent basis, which will allow you to make decisions in a mechanical and nonemotional way. Common mistakes that traders make are not testing a strategy and not mak- ing a logical determination of whether the strategy is viable for their trad- ing style. Many traders adopt a new strategy, trade with it, and immediately start tweaking different components of the strategy. The best approach that I have found in trading is to establish trading rules and to test those rules until an outcome is determined based on a reasonable number of trades. Also, I have several different trading strategies for different markets or conditions. The high close doji, the low close doji, and the jackhammer patterns are just a few of my proprietary setups that I watch for meeting these conditions. If you are in a declining market, once an apparent bottom occurs near 254 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS c08.qxd 9/25/06 8:38 AM Page 254 [...]... conditions, and others will work well in nontrending market environments Therefore, it is important to back-test a methodology for various time periods and in various noncorrelated markets to see if the principles are sound and stand the test of time So far, with what we have gone over, you can develop your own rules based on pivot point and candlestick patterns S 279 280 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS. .. and have taught at seminars is that the first rule of trading starts with the premise that it is okay to form an opinion on a gut, or instinctive, feeling—just act on a trade 257 2 58 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS signal that substantiates that opinion Write your rules down and have them posted on your trading screen on your computer Before you enter the trade, check your rule list; and. .. use scale trading as a means to stagger positions to enter as well as exit a market There are many variations and specific techniques It can be argued that rather than scaling out of half of the positions, you 2 78 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS should actually add on to trades to really pyramid profits I personally do not use this style of trading I encourage you to explore any and all... permission of Townsend Analytics, LTD 276 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS moving averages have crossed and the market is trading below both values We have a call to action to sell on the close or on the next open This chart is the e-mini–Standard & Poor’s (S&P), and we would be filled at 1264.25 The market declines in the perfect order—lower highs, lower lows, and lower closing lows—right until... percent line, once %K and %D crossed and closed back above the 20 percent level, a buy signal would trigger Using the value of the pivot point resistance target of R-1 while combining the three-period pivot point moving average with the five-period pivot point moving average, once the three-period crossed and closed below the five-period pivot point moving average, within five points either above or... INTEGRATE PIVOT POINTS TO HELP TIME OUR EXITS? We have gone over how to move the stops and why it is good to scale out of positions We can integrate pivot points to help us trigger our entries and use the pivot point support or resistance levels to help us target our exits As shown in Figure 10.4, we have a 15-minute candle chart showing a classic sell signal with a low close doji at pivot resistance, and. .. market triggers a signal to go long with the high close doji, combining a close below doji low and the crossover point (using both the one-period pivot point and the three-period pivot point moving averages) can act as a stop placement level Once again, you would want to look at the point of crossover of the two moving average values; and if the market closes below the low of the doji’s low and the... review of the overall purpose of the trading methods discussed in this book Pivot point analysis helps give me a “heads up” on the potential range of a session The moving average of the pivot point helps give me a truer reflection of the market’s value, and that helps me define the market’s condition and possibly the correct direction Candlestick charts help illustrate and define the trigger, which enables... esignal.com 272 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS Now what about the balance of my positions, and where do I place my stops? In this example, I would suggest either moving stops up to my break-even point or, as just discussed, placing the stop on a close below the low of the most recent conditional change candle (a higher closing high), which occurs at the 6:15 time period At this point, I do... One of the greatest ben- 274 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS efits here is that you have access to the markets on a 24-hour basis, unlike the equity markets SCALE AND TRAIL The euro currency chart in Figure 10.3 demonstrates a nice swing trading opportunity and how scaling out of half of your positions is a great mechanism to capture profits while staying with a potentially longer-term trend . hammer and then the next candle being the tall white, or 252 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 8. 35 Used with permission of esignal.com. c 08. qxd 9/25/06 8: 38 AM Page 252 Setups and. method is 2 58 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS c09.qxd 9/25/06 8: 40 AM Page 2 58 used less frequently by professional traders because it has no relevancy to a mechanical trading model,. market, once an apparent bottom occurs near 254 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS c 08. qxd 9/25/06 8: 38 AM Page 254 a pivot point support target, watch for the high close doji or the